Curious case of the Woolies CEO exit despite record profits

An investor call with Woolies CEO Brad Banducci on Wednesday might reveal why he has stepped down despite the supermarket giant’s record profits.

ANALYSIS

Well the Woolies CEO Brad Banducci is going to quit in September. He will spend his last few weeks at work working in a store – so he said on Wednesday – at the small-scale Metro outlet in the inner-Sydney suburb of Marrickville.

If there’s an unexpected item in your bagging area later this year, the guy who comes and sorts it out for you might be making more than $7 million a year.

Mr Banducci’s departure is curious. Nobody saw it coming, but the company insists it was planned all along. He certainly hasn’t been let go for allowing margins to drop. Operating Profits have been strong too, in the Australian supermarkets at least. Big W has been losing money but that’s nothing new.

Woolworths CEO Brad Banducci is going to get stuck in on the shop floor before he leaves. Picture: Supplied

Woolies NZ also isn’t doing that well but that’s partly about their economy. In fact, Woolies reported a loss in the most recent period, but it’s not an operating loss, it’s an accounting loss relating to some writedowns.

The company has been doing well in store in Australia and blazing away online, with massive online sales growth of 21 per cent over the last year. It’s no surprise the incoming CEO Amanda Bardwell is currently the head of their online innovation division, WooliesX. That part of the company is doing well.

The problem of profit

Woolies margin has been very strong in the last little while. They are putting plenty of mark-up on every item. Gross margin in the Australian food business (i.e. supermarkets but not other companies like BIG W also owned by Woolies) was 28.9 per cent in the last six months up from 27.9 per cent in the same period in the previous financial year.

On an investor phone call on Wednesday morning, one of the investment banking guys asked whether that was smart, in the current environment. Mr Banducci conceded that making so much margin in this period looked bad. They call that “optics” i.e. the way something looks.

“We’ve got an optics challenge,” he said.

But what if he’s wrong? What if Woolies has a loyalty challenge? What is Woolies is facing similar problems to those Qantas is experiencing?

Is Woolies in danger of gaining a reputation like Qantas? Picture: Supplied

Mr Banducci has done a nice job for shareholders in the short run. When prices went up, margins held up. Woolies didn’t meet us in the middle and share the pain. Investors were fed well.

Back on that Wednesday investor phone call, investor representatives showered Mr Banducci with praise.

The guy from Bank of America said, “You’ve been a wonderful CEO for Woolworths,” and the rest of them agreed. “Congratulations!” said the analyst from Goldman Sachs. It was a big love-in.

Mr Banducci has plainly focused on making those stakeholders happy, and it has worked.

But he’s left Woolies vulnerable.

Mr Banducci might find his last few weeks in the shop – where he’s face-to-face with customers instead of investors and corporate colleagues – quite eye-opening.

If he expects customers to farewell him with the same genuine affection he gets from the investment banking community he could be in for a rude shock.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.

Originally published as Curious case of the Woolies CEO exit despite record profits